51Talk Online Education Group (COE) 2021 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group's Second Quarter 2021 Earnings Conference Call. (Operator Instructions). I will now turn the call over to your host [Ms. Ni Yan], Investor Relations for the company. Please go ahead.

Hello, everyone and welcome to the second quarter 2021 earnings conference call of China Online Education Group, also known as 51Talk. The company's results were issued via newswire services earlier today and are posted online. You can download the earnings press release and sign up for the company's distribution list by visiting the IR section of our website at ir.51Talk.com.

Mr. Jack Huang, our Chief Executive Officer; and Mr. Min Xu, our Chief Financial Officer will begin with some prepared remarks. Following the prepared remarks, Mr. Liming Zhang, our Chief Operating Officer will also join the call for our Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding this, and other risks and uncertainties is included in the company's Form 20-F and other public filings as filed with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law.

Please also note that 51Talk's earnings press release and its conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. 51Talk's press release contain a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our CEO, Jack Huang. Please go ahead.

Hello, everyone and thank you for joining our conference call. We achieved another strong quarter as second quarter net revenue reached RMB 579.8 million, primarily driven by 35.7% year-over-year increase in the number of active students. On July 24, 2021, relevant Chinese authorities issued the Opinions on further alleviating the burden of homework and after-school tutoring for students in Compulsory Education which contains high-level policy directives about requirements and restrictions related to online and offline after-school tutoring services.

Aligned with the Opinion's directives and requirements, 51Talk launched brand new All-round Proficiency Courses in small class format for children and teenagers led by Chinese teachers. Meanwhile, we plan to grow our overseas business by offering one-on-one classes for international K-12 and adult student users taught by foreign teachers.

Where there are new challenges, there will also be new opportunities. In keeping with the revised framework and regulations for our industry, we will continue to innovate our course offerings and explore the growth opportunities.

With that, I will now turn the call to our CFO, Min Xu.

Thank you, Jeff. Hello, everyone. We recorded a 17.5% year-over-year increase of net revenue and a RMB 27 million net loss in the second quarter. Under the new regulations, the Company has taken actions to adapt to the latest operating environment and will take measures to improve operating efficiency. Looking ahead, we have confidence in continuing to create value for our students and teachers while conforming to applicable laws and regulations.

So net revenues for second quarter was RMB 580 million, a 17.5% increase from RMB 494 million for the same quarter last year. The number of active students in the second quarter was 404,000, a 35.7% increase from 298,000 for the same quarter last year. Gross margin for the second quarter was 72.7% compared with 70.9% for the second quarter last year. The increase was mainly attributable to the decrease of cost per lesson, partially offset by a decrease of the revenue per lesson. One-on-one gross margin for the second quarter was 73% and a small class gross was 64.3%.

Total operating expenses for the second quarter were RMB 461 million, up 38.7% year-over-year. Sales and marketing expenses for the second quarter were RMB 316 million, a 57.4% of gross billings for the second quarter. Excluding SBC, non-GAAP sales and marketing expenses for the second quarter were RMB 313 million, representing 57% of gross billings for the second quarter.

Product development expenses for the second quarter were RMB 65 million, a 68.4% increase year-over-year. Excluding SBC, non-GAAP product development expenses for the second quarter were RMB 63.4 million, a 71.5% increase for the same period last year. G&A expenses for the second quarter were RMB 80 million, a 48.7% increase from the same quarter last year. Excluding SBC, non-GAAP G&A expenses for the second quarter were RMB 75 million, a 46.6% increase from the same period last year.

Other income for the second quarter was RMB 5.6 million of super deduction credit. Operating loss for the second quarter was RMB 34 million compared with operating income of RMB 27 million for the same quarter last year. Non-GAAP operating loss for the second quarter was RMB 25 million compared with non-GAAP operating income of RMB 34 million a year ago.

Net loss for the second quarter was RMB 27 million compared with net income of RMB 33 million last year. Non-GAAP net loss for the second quarter was RMB 18 million compared with non-GAAP net income of RMB 40 million for the same quarter last year.

Income tax expense for the second quarter was RMB 2.9 million. Basic and diluted EPS for the second quarter was negative RMB 1.24 compared with basic EPS of RMB 1.55 and diluted EPS of RMB 1.44 for the same quarter last year. Each ADS represents 15 Class A ordinary shares. Non-GAAP basic and diluted EPS for the second quarter was negative RMB 0.82 compared with non-GAAP EPS of RMB 1.87 and a diluted EPS of RMB 1.75 for the same quarter last year. Gross billings for the second quarter were RMB 550 million, an 18.7% year-over-year decrease. This is mainly driven by the decrease of our package size, partially offset by the increase in paying students.

As of June 30, 2021, the company had total cash, cash equivalents, time deposits and short-term investments of RMB 1.64 billion compared with RMB 1.73 billion as of December 31st, 2020. Advances from students were RMB 2.7 billion as of June 30, 2021, compared with RMB 2.72 billion as of December 31st, 2020.

So for our outlook, for the third quarter of 2021, the company currently expects net revenues to be between RMB 550 million and RMB 555 million, which would represent an increase of approximately 2.1% to 3.1% from RMB 539 million for the same quarter last year. The above outlook is based on current market conditions and reflects the company's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

This concludes our prepared remarks. We will now open the call to questions.

Operator, please go ahead.

(Operator Instructions) As we seem to have no questions over the phones, I'd like to turn the call back over to the company for any additional or closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact 51Talk's Investor Relations through the contact information provided on our website or The Piacente Group Investor Relations. Thank you.

Apologies for the interruption. We do now actually have a question over the phone from Vincent Yu of Needham & Company.

(foreign language) Sorry and apologize for some connection issue earlier. So the question is that the operations strategy facing the regulation in terms of the foreign teachers and the other regulations in terms of academic changing.

[Interpreted]. Okay. So first of all, thank you for the question. So everything the new regulation is out (inaudible) and we quickly took a lot of actions to, number one, to be compliant to the regulation. We stopped selling the one-on-one lesson taught by Filipino teachers to our Chinese students. And so instead, we launched a new course, we call 51(inaudible) it's actually an All-round Proficiency Course which is kind of not only, so first of all, it's taught by Chinese teachers.

Second is, it uses both English language and Chinese language. And so not only we teach them language, we also teach a lot of other capabilities, including the creativity, public performance, public speaking, social capability, critical thinking and [empathy]. So this is a non-academic course that really can provide a lot of value to our existing students and new students. So our new 51(inaudible) all-round proficiency course will be our flagship product for our Chinese students.

So in addition, we already have quite a number of overseas students. And so we will continue to offer our existing one-on-one mass market taught by our Filipino teachers to our overseas students, and we believe there's a great potential for that market.

And also, we were quite strong in adult learning market, and we will continue to invest in this market, and we will try to grow in this sector too. So these are kind of our strategy after the new regulation is out. Hope this answers your question, Vince.

Yes. Very clear. Just a follow-up in terms of the teachers phase. (foreign language). So for the future classes, they all will be taught by the Chinese domestic teachers, right? Just not a temporary phase, but for like forever, or it will translated into domestic teacher group?

Correct. For the foreseeable future, in China, we will only use Chinese teacher to teach our new 51 (inaudible) course. Yes, it's correct.

We have no further questions. I'd like to turn the call back to the company for closing remarks. [Ms. Ni Yan], please go ahead.

Thank you once again for joining us today. If you have further questions, please feel free to contact 51Talk's Investor Relations through the contact information provided on our website, or The Piacente Group Investor Relations.

This concludes this conference call. You may now disconnect your lines. Thank you for joining.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]